Even as China lags, molders shift to high-end equipment

GUANGZHOU, CHINA — With signs that China's manufacturing industry contracted in May, you might have expected a lot of caution inside the halls of the Chinaplas show in Guangzhou.

Caution was there, of course. The widely watched HSBC China flash purchasing managers index for manufacturing was 49.6 in May, down from 50.4 in April, its worst performance in seven months and an indication of contracting demand.

Some companies, particularly Japanese firms, were reporting a challenging environment, as the HSBC survey was predicting a slowdown for manufacturers in China in the second quarter.

But many executives were pointing out something more important happening for the long-term — a continuing shift toward more expensive, sophisticated equipment in the capital investment of Chinese factories.

As those factories face rapidly rising labor costs and demands for higher quality domestically, they're investing in better equipment, and that's benefiting both the top-tier of local firms and foreign companies in China, who are increasingly building more capacity in the country, executives said.

For example, last year was a record year for Demag's China operations in revenue and profits, and that's prompting the company to seriously consider expanding its factory in Ningbo, where it makes injection molding machines, Stephan Greif, chief executive officer of the Ningbo operations of Demag Plastics Machinery Inc., which is part of Japanese-German conglomerate Sumitomo Demag.

"The market trend is very fast going to the medium and medium-high level," he said. "Compared to two years ago, it is amazing."

The 2012 gain that Demag saw runs counter to an overall drop of 3.5 percent in China's plastics machinery market last year, to US $7.92 billion. As well, two of China's largest publicly-listed plastics machinery makers reported that their sales contracted more than 10 percent in 2012.

The IMF on May 28 slightly lowered China's economic growth forecast this year, and HSBC suggested the manufacturing environment there would toughen this quarter.

"The cooling manufacturing activities in May reflected slower domestic demand and ongoing external headwinds," said Hongbin Qu, HSBC chief economist for China, in a statement. "A sequential slowdown is likely in the middle of 2Q, casting downside risk to China's fragile growth recovery."

That didn't seem to be dampening foreign-owned machinery companies interviewed at Chinaplas, however. Engel Austria GmbH said its China business rose 10 percent last year, as its market segments grew.

"The relevant market for us is the higher end," said Gero Willermoth, president of sales and service at Engel Machinery (Shanghai) Co. Ltd. "The higher end is still growing."

The annual demand for injection molding machines in China is expected to drop from 45,000 last year to 35,000 by 2015, according to statistics from Engel presented at a Chinaplas press event.

But countering that volume drop, automation levels are rising and the machines that are being sold are higher quality, both trends that benefit Engel.

Lossburg, Germany-based Arburg GmbH & Co. KG, for example, said that 30 percent of its machines in China are sold with robots, compared with 35 to 40 percent in Europe, said Helmut Heinson, managing director of sales.

"China obviously catches up with other parts of the world in automation," he said. "The customers are getting more and more demanding and see the value of higher technology machines."

"Last year, what we experienced here is that our segment of the market, the higher end segment, was not influenced by the situation in China," Heinson said.

Greif said the market is shifting from a pyramid shape, where the biggest segment is in the lower-end machines, to more of an onion, where the middle market is biggest, and the lower-end becomes smaller.

Several foreign machinery makers were making more investments in China: Engel last year doubled capacity at its Shanghai plant and American machine maker Milacron Inc. has said it plans to expand its China factory.

As well, they several foreign machinery firms at Chinaplas said they were making smaller investments: Arburg was adding a distribution warehouse in Shanghai to reduce lead times, and Engel was adding a Shenzhen showroom to boost its presence in South China.

Similar to the machinery companies, American materials firm A. Schulman reported that it was in the middle of more than doubling its capacity at its Dongguan compounding facility, and said its China business seemed to be doing better than the overall market.

"I read the reports on China and they are somewhat gloomy," he said, but noted that "we're doing better than the market… In China we find that the engineering polymers business is growing faster than we thought."

One segment of foreign firms that did not seem to be faring as well was the Japanese. In several booth interviews, executives said it was a tougher environment, with political tensions between China and Japan and Japanese firms shifting some of their investments to other markets in Asia.

But by and large, machinery companies were reporting better prospects. Some of the larger publicly-listed Chinese companies were also saying that business conditions had improved.

An executive at Cosmos Machinery Co. Ltd. said, for example, that "this year is much better than last year" and sales were back on a growth path, after revenues in its machinery unit dropped 23 percent in 2012.

And Haitian International Holdings Ltd. said the smooth transition to new leadership in China has given its customers more confidence, after they held back last year ahead of a once-in-a-decade change of government leaders in China.

"People are more confident about the direction of the new government," said Helmar Franz, chief strategy officer for the Ningbo-based firm. "There is certainty about the planning for the years ahead, so they invest."

As well, he said Haitian's small injection press business is growing. That segment is more responsive to immediate market conditions and that "normally is a sign the economy picks up again," he said.